(1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

(2) the service is performed outside the usual course of the business of the employer; and

(3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The franchisor (Coverall North America, Inc.) failed to carry its burden of establishing all three elements, the court held. In particular, the franchisor failed to establish the second prong of the test—that the franchisees were “performing services that are part of an independent, separate, and distinct business from that of the employer.”

Cleaning Business v. Franchising Business

In attempting to establish that the franchisor and its franchisees are distinct businesses, the franchisor argued that it is not in the commercial cleaning business, but is in the franchising business, the court noted.

The franchisor maintained that it sells franchises and trains and supports the franchises, but neither cleans any establishment nor employs anyone who cleans any establishment. It further claimed that “numerous courts have accepted that the functions and business of a franchisor are separate and distinct from those of a franchisee and that their shared economic interest does not make one the employer of the other.”

The court agreed that there have been rulings that shared economic interests do not make one the employer of the other, but that such rulings did not establish the conclusion that the functions and business of a franchisor are separate and distinct from those of a franchisee.

“Coverall’s argument is not unlike arguments made by other employers in Massachusetts who also required their employees to sign agreements stating that they were independent contractors,” the court stated.

“Ponzi Scheme”

According to the court, “[d]escribing franchising as a business in itself, as Coverall seeks to do, sounds vaguely like a description for a modified Ponzi scheme—a company that does not earn money from the sale of goods or services, but from taking in more money from unwitting franchisees to make payments to the previous franchisees.”

Such a description does not apply to the franchisor, the court said. As a result of the expenditure of time, skill, effort, and money, Coverall developed the system used by its franchisees. It trains franchisees and provides them with uniforms, contracts with all customers, and receives a percentage of revenue earned on every cleaning service.

“These undisputed facts establish that Coverall sell cleaning services, the same services provided by these plaintiffs,” the court found.

Because the franchisees did not perform services outside the usual course of Coverall’s business, the franchisor failed to establish that the franchisees were independent contractors, in the court’s view.

The decision is Awuah v. Coverall North America, Inc., Civil Action No. 07-10287-WGY, March 23, 2010. It will appear in the CCH Business Franchise Guide.

Reaction

In a March 29 news release, the International Franchise Association (IFA) said that the ruling will “severely impact the ability of franchise businesses to operate, create jobs and provide millions in economic output” in Massachusetts.

“We feel the judge did not take fully into account the unique attributes of franchising and the federal regulatory oversight of the franchise business model,” said David French, IFA Vice President of Government Relations.

“Wrongfully defining franchisees as employees of the franchisor instead of business owners, as the ruling does, threatens the viability of franchising as a business model in Massachusetts and will likely lead to franchise companies ceasing operations,” he stated.

The IFA is supporting legislation filed in Massachusetts that would change the independent contractor law to require violation of all three prongs for an entity to be deemed a “misclassified worker.”